Question 1: ( 20 marks )
Bags Unlimited is currently in the process of finalising their financial statements for the year ended 31 December 2018. The following events occurred since 1 January 2019 and 28 February 2019:
A. Current tax expense of R20 000 had been incorrectly debited to revenue in 2018.
B. A debtor that owed Bags Unlimited R100 000 at year-end was in financial difficulties at year end and, as a result, the company processed a doubtful debt adjustment
of R30 000 against this account. In January 2019, the debtor’s lawyers announced that it would be paying 40% of all debts.
C. A debtor that owed Bags Unlimited R150 000 at year-end had their factory destroyed in a labour strike in December 2018. As a result, this debtor has filed for insolvency
and will probably pay 60% of the balance owing. Bags Unlimited was unaware of this debtor’s financial difficulties at 31 December 2018.
D. Inventory carried at R100 000 at year-end was sold for R80 000 in January 2019. It had been damaged in a flood during July 2018.
E. A court case was in progress at 31 December 2018, in which Bags Unlimited was the defendant. No provision was raised at year-end because Bags Unlimited disputed the claims made. The court has since ruled against Bags Unlimited but has not yet indicated the amount to be paid to the claimant in damages. The company’s lawyers have estimated that an amount of R300 000 will be payable.
F. Bags Unlimited declared a dividend on 05 February 2019 of R25 000.

Required: ( 20 marks )
Explain whether the above events should be adjusted for or not when finalising the financial statements for the year ended 31 December 2018.
If the event is an adjusting event, provide the relevant journal entries.

QUESTION TWO ( 50 marks )
Remove a Dent Limited is a profitable service provider and retailer in the panel beating industry. It recently appointed a new managing director who is an expert on panel beating, estimating and car parts but has limited experience in accounting. You are the accountant and the new managing director has asked you to prepare a draft set of financial statements for discussion with the rest of the board of directors.
The director has told you that a customer has brought in their vehicle for repairs and paid an amount of R12 500 for the left-hand side door which was required to be ordered. Payment was made on the 28th of December 2019 however the door will only arrive after year end on the 15
th January 2020 when the manufacturers open. The director has requested you to ensure that this transaction is included when you prepare the financial statements.
The company purchased a dent puller machine in 2018 which removes the dents. The machine was purchased on the 1 January 2018 for an amount of R75 000 and had a nil residual value. Due to the current pandemic and economic downturn with the resultant reduction in sales, the directors decided to sell the machine. The machine was sold for an amount of R25 000 on the 1st of January 2019.
The company depreciates its machinery over a straight-line method over 5 years. The tax authority allows a wear & tear allowance of 33 1/3% for machinery.
Profit before tax before considering the above noted transactions was R250 000 in 2018 and R175 000 in 2019. No payments were made to the tax authorities in any of the years and no amount was owing in 2017. Tax is calculated at a rate of 30%. There were no other temporary nor permanent differences.

Required:
Draft a memorandum to the managing director in which you include the following:
a. The deferred tax calculation using the balance sheet approach (20)
b. The current tax calculation (10)
c. Disclosure in the AFS relating to the above. (20)
Your memorandum must include all workings and comparatives to enable the managing director to understand the financial statements better.

QUESTION THREE ( 25 marks )

Verruca Limited, a convenience franchise attached to Go Fuel Filling Stations, has recently launched a customer loyalty programme that rewards a customer with one customer loyalty point for every R30 of purchases. The loyalty programme is optional ie customers need to register to join it and it is free to join. However, not all customers choose to take advantage of the programme. Each point is redeemable for a R3 in value for purchases of Verruca Limited products. During a reporting period, customers who took part in the loyalty programme purchased products for R450 000, thus earning the promised number of points.
Verruca Limited expects 95% of the points to be redeemed. The entity estimates a stand-alone selling price of R3 per point.

Required:

1. Briefly explain how Verruca Limited should account for the customer loyalty programme with respect to the performance obligations and allocation of the transaction price
Your answer should include:
– Identifying the performance obligations (4)
– Allocation of the transaction price (12)
– When the performance obligation will be satisfied (2)

2. Prepare the required journal entry on the date of the sale of goods (7)

QUESTION FOUR [ ( 25 marks )

Lindor Limited enters into a contract with Property Net Limited for the lease of three floors of an office building. The exact floors are specified in the contract and Property Net Limited is not permitted to relocate tenants to other floors of the building.

The commencement date of the lease is 2nd January 2022 and the duration of the lease is for five years with the option to extend for a further five years. Lindor Limited is reasonably certain to exercise the option to extend the lease.

The lease payments are R50 000 per annum during the initial term and R55 000 per annum during the optional term, all payable in advance.

Lindor Limited incurred initial direct costs of R20 000, comprising R15 000 as compensation to the tenant formerly occupying the three floors and R5 000 as agent commission. These are paid on 2 January 2022. Property Net Limited agrees to reimburse the R5 000 agents commission.
The interest rate implicit in the lease is not readily determinable. Lindor Limited ‘s incremental the borrowing rate is 5% per annum.

The following present value table is provided:

Details PV Factor
Present value of annuity in advance of R1 for years 1 to 5, discounted at 5% 4.5459
Present value of annuity in advance of R1 for years 6 to 10, discounted at 5% 3.5619

Required:
1. Calculate the amount to record as the initial lease liability AND right of use asset (7)
2. Prepare the journal entries in the accounting records of Lindor Limited for the year ended 31 December 2022 (18)

QUESTION FIVE ( 25 marks )

Kaas Limited purchased 1 000 liters of unpasteurised milk on 1 October 2022 for R50 000, half of which had been used in the production of long-life milk during October 2022 and sold to supermarkets between October and November of 2022. The remaining 500 liters was frozen for future use.

On 1 December 2022, a consumer suffered serious food poisoning and alleged that it was caused by the long-life milk produced by Kaas Limited. This consumer took legal action against

Kass over the poisoning. Kaas Limited is not insured against the potential losses that may result from claims of this nature.
Due to public interest, the case went to court almost immediately. Indications during the court proceedings, held in late December 2022 were that Kaas Limited was probably responsible for poisoning and would probably be found guilty. It was found that the long-life milk was poisoned because the milk used in its manufacture had been contaminated. At 31 December 2022 it was too soon to be able to reliably estimate the settlement costs.

Due to the negative publicity arising from the court case, Kaas Limited decided not to plead against the inevitable ‘guilty’ verdict and to willingly pay all costs, in the interests of salvaging a positive public image.

The financial director is finalising the financial statements for the year ended 31 December 2022 and the board plans to authorise the financial statements for issue by mid-February 2023. The following events relating to the case are relevant and need to be considered:

a) Warnings by the lawyers:
Kaas Limited has been unable to keep the case out of the media and their lawyers warned in December 2022 that as soon as the verdict was published in the media, more similar cases will probably be brought against Kaas Limited by other aggrieved customers, although it was impossible to estimate the number of cases or their financial impact.

b) Estimated settlement costs:
During January 2023, Kaas Limited’s lawyers obtained further information that enabled them
to estimate that the court would award the plaintiff R250 000 whereas an out-of-court settlement would probably be R220 000.

c) Findings of specialists:
Specialists hired by Kaas Limited in January 2023, but before publishing the financial statements, confirmed that all of the 500 litres of unpasteurised milk held in cold storage at year-end is also contaminated and must be destroyed.

d) Possible returns:
By the time the financial statements were authorised for issue on 15 February 2023, no further containers of long-life milk had been returned. It seems that there is only a remote chance that there would be any returns at this late stage.

Required:
All amounts are material but none of the issues mentioned above have caused there to be a going concern problem.

Discuss how, if at all, the events described in (a) to (d) above should be recognised, measured and disclosed in the financial statements of Kaas Limited for the year ended 31 December 2022 with reference to International Financial Reporting Standards. See mark allocation per issue below.

Your answer should include relevant definitions from IAS 10 Events after the Reporting Period and 37 Provisions, Contingent Liabilities and Contingent Assets. Ignore taxation

Answers to Above Accounting Questions

Answer 1: An analysis of whether the above events should be adjusted for or not when finalising the financial statements for the year ended 31 December 2018 is performed as follows:

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